Q2 2020 CapStar Financial Holdings Inc Earnings Call
[music].
Hosting the call today from Capstar art in schools.
You bet and Chief Executive Officer.
My father.
Chief Financial Officer.
Increased <unk>.
Chief Credit Officer.
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That's called <unk> earnings release, the presentation materials that will be referred to in this call and the form 8-K, that's capstar filed with the S. E. C are available on the S. East website at Www <unk> E C that golf and they Investor Relations page.
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With that I'm now going to turn the presentation over to Tim schools.
GAAP stars, President and Chief Executive Officer.
Thank you good morning.
As you're aware and we've seen from other banks. This has been in highly unusual quarter bankers from across the country, including ours have had to act swiftly and think differently I'm proud of our industry enough capstar.
Before I provide the highlights of our quarterly results I'd like to review a few of cap stars accomplishments during the quarter to demonstrate a tremendous amount very positive work our teammates dead on top of their daily jobs, which they do so well in servicing our outstanding customers.
First 100% of our operations and support staff mobilized and I've been working remotely since March and continue to do so.
Second we very early offered what we refer to as they liquidity related referral program not a credit related deferral program to be great community partners and helping keep cash in our markets, hoping for the best that in that this event would be shorter than its turned out today.
Based on a Nashville post report of area lenders. If you take the relative size difference of the middle Tennessee banks, we work the market leader in P.P.T. originations, we served both clients and about 50% of our originations were non clients.
We're now proactively working with these non clients as many could not get their banks to respond.
In early success of this effort is we have already transitioned a 4 million dollar deposit or with 6 million an outstanding loans from one of our major competitors it might not have been a meaningful relationship to them, but it's right in the Bulls eye for us.
Fourth we raised $30 million of sub debt at rates advantageous to the majority of those raising at the same time.
That's us who have similar size and quality.
Ironically, we receive feedback last summer that we could improve our returns and we're utilizing too much equity.
Therefore, we initially structured a cash component to our recent actually be deal with the goal of lowering our equity levels.
But with the uncertain outlook felt in the current environment.
Was in the best interest of our shareholders to be conservative and raise additional capital to limit the potential of ever having to issue common equity in a deep recession, a very low prices.
Seth we closed for FCB transaction, which further matures our company, bringing to 115 year old very well run institutions indoor family.
Six.
I completed my executive team with the addition of Micropower, whose timing is ideal is he is a very experienced senior financial leader with strength in risk adjusted return on capital balance sheet management and performance management. We're excited to have Mike and he will be very instrumental in some of our long term priorities.
Which I will address at the close of this call.
Having John Davis, Mike Sour and Mike Hill to an already experienced group of individuals.
Very strong team.
Lastly, you might've seen we've reached a collaborative agreement with Galen Lawrence disagreement resolved our outstanding differences in calls for Galen to limit his ownership to 9.9% into vote with Capstar on major issues and provides for management to meet with him as requested on a quarterly basis.
As we do with other institutional investors and to have the opportunity to visit with our board of directors. Once every six months.
The only about a gay one and I are excited about cap star and I'm grateful for his investment and look forward to building a long term relationship with them.
So as you can see a lot was accomplished in a single quarter. In addition to looking out for each of our personal health in running the bank.
We have a strong company, which we are making even stronger.
Quickly I'll highlight our quarterly results, which were solid we reported operating earnings per share of 36 cents.
And return on average tangible common equity of 11.02%.
This quarter, we had severance totaling 1.4 million, which we have not excluded from operating results.
Adjusting for the severance, which we do not to expect to routinely occur.
Our earnings per share were 41 cents.
Per share.
And the return on average tangible equity was 12.84% so a fantastic quarter.
Key to our results this quarter was a record level a pretax pre provision this allowed us to earn a nice return on capital, while still providing reserves for the uncertain economy.
Our mortgage and try not divisions, each had record quarters, but I'm equally proud of our net interest income which was sustained by hard work from many who are tremendous PPP results in our core expenses, which are adjusting for increased mortgage incentive compensation and the suffer.
Severance I referenced above.
He is in line with the past four or five quarters. So great discipline, and we will continue that as we work through the challenging environment.
Chris teach is going to provide insights into our credit metrics and outlook, but I'll share that I am cautiously optimistic on the economy, and the resulting potential impact on capstar.
We operate in a strong region of the country and while not at recent levels. Our communities are maintaining a healthy level of economic activity and that is increasing every day.
We are by no means out of the words, but there is hope of continued improvement and stabilization.
We are strong underwriters and risk managers and as you will hear in C. For the most part our customers are holding up well and reporting reasonable although reduced cash flows and a level of liquidity to assist them. During this most challenging time.
Of note I would point out our past due classified asset and nonperforming asset ratios have been an extremely low levels and to date have seemed a little impact from the pandemic with that I'll turn it over to Mike Fowler.
Huh.
Thank you, Tim and good morning, everyone.
On page eight Oh.
The earnings slides.
Net interest income increased 6.1% versus first quarter.
I really do two P.P.P. loans.
The net interest margin of 3.2 or 3%.
Was down 27 basis points versus Q1.
We estimate that PPP was fairly neutral to the margin.
Well higher cash driven by.
330 million increase and deposits in the quarter.
Accounted for approximately 17 basis point of the NIM decline.
The remaining 10 basis points of NIM compression reflects the full quarter impact of the sad <unk> hundred 50 basis point March emergency rate cuts, given our asset sensitive interest rate risk position.
We are actively assessing opportunities on both sides of the balance sheet to enhance profitability, including potentially redeploying a portion of surplus cash into conservative investments, ensuring that deposit pricing appropriately reflects current market rates.
And assessing opportunities to reprice or exit unprofitable non core deposit balances.
On page nine.
Deposit balances for us and for the industry have surge since the start of the pandemic.
We had 76% annualized growth versus Q1, primarily and now accounts and non interest bearing demand deposits.
We actively reprice deposits throughout the quarter driving a 55 basis point decline and the average deposit yields versus Q1.
On slide 10.
Excluding 222 million of P.P.P. loan balances loans were down about 75 million versus Q1 with a majority related to a 4.7% decline in line utilization, which reversed.
Prior quarter increase.
For the last 18 to 24 months, we've had heightened emphasis on Tennessee and market banking.
So nashvilles high property values have contributed to the sale of various properties war or projects and to pay down of related loans management maintains a constant focus on business development efforts that we have a strong and actively manage pipeline.
On page 11, as Tim noted.
We are proud of her teams efforts supporting clients.
Non clients through the P.P.P. program.
And we're excited about to support our team is provided to 1500 businesses and their communities.
Benefiting more than 25000 employees.
We're also excited as convention.
To develop broader relationships with the 50% of PPP borrowers who are not previously caps to our clients.
We're actively calling these borrowers and monitoring yourselves through or active pipeline process.
On page 12, I'd note that lot loan yields have declined 60 basis points versus the prior quarter.
With about 11 basis points of that decline related to PPP.
And I would say from an interest rate risk perspective.
We intend to gradually move toward a more neutral interest rate risk profile over time.
On page 11.
I'm sorry on page 13 highlights are strong noninterest revenue for the quarter.
Driven as Tim mentioned by record levels of revenue in both our mortgage banking business that are trying to business.
We certainly do not expect coming quarters to be at second quarter levels.
But we do expect.
Continued strong performance and we do have outstanding standing teams in both businesses.
Noninterest income is also as noted on the slide is net of a 238000 dollar impairment charge on our retained mortgage servicing rights related to continue decline in mortgage rates.
Page 14 gives a little more color in terms of mortgages record quarterly revenue.
Driven by 67% increase in origination volumes and 110 basis point increase on gain on sale margins.
We go to page 15.
Operating non interest expenses, which exclude.
For our reporting only Merck merger related costs were up 4.6 million versus Q1.
Yes, Tim referenced earlier the majority of this is driven by 2.4 million dollar increase and mortgage banking expenses related to their record revenues.
As long as 1.4 million and severance costs.
Expenses continue to be top of mind Bailey.
We continue to see ongoing opportunities to enhance efficiencies.
I'll turn it over to Chris.
Talk about our credit position great. Thank you, Mike as I know you're hearing everywhere second quarter. This year has been the most unprecedented in my 35 year career.
As we said last quarter, we entered these uncertain times from starting place that includes good asset quality with a diversified portfolio and historically resilient markets.
First as we will discuss in a minute we acknowledge that Nashville was a major tourist destination and we'll have some disparate impact from reduced spending for travel lodging and events, but for reasons will discuss in a few minutes. We continue to believe the resilience of Nashville market.
And take confidence in our high cash equity underwriting disciplines in the commercial real estate sectors, most impacted by the pandemic.
Second we remain committed to multiple external reviews of our portfolio annually and are pleased to report the successful completion of the first review in 2020, we remain committed to timely and accurate risk rating, improving both diversification and risk granularity in our target borrower profile and an improving our delivery of stable credit outcomes to us.
Sure holders.
Third we reiterate the theme as discussed last quarter that underscore our balance sheets ability and earnings power to resiliently withstand that central stressors from the uncertain economic environment that we're operating with them.
We believe that our confidence is reinforced by our own recent stress test and buy we view the assumptions contained in the recent de fast update applied to the larger institutions.
How's the cold it impact early in the pandemic in mid March as a service to our customers and communities and to reduce the tanks. The pandemics uncertainty was causing we rolled out our hassle free 90 day deferral on an opt in basis to all customers. This was to assuage concerns that existed won't government programs like payroll.
Detection and Mainstreet, we're still on the drawing board.
By the close of the often period in May based on 630, non P.P. that balances held to maturity approximately 33% of our customers that have opted in for this three month deferral.
Yeah, we're qualifying criteria requiring that the borrower be less than 30 days delinquent in order to get the deferral.
At the time that we offered this it is relevant to note the greater than 99% of our nodes and greater than 99.5% of our balances were contractually current and eligible to participate.
All the 33% that opted into the deferral at this whiting, we believe that approximately 20% of them, we'll ask for another form of deferral and that this will equal about 6% to 8% of our total loan balances in most cases, we expect the requested accommodation to be deferral of principal only four.
Week period and for the borrower to have sufficient cash flow or liquidity to cover the need of interest payments as before we anticipate most borrowers will choose this deferral to preserve liquidity in this uncertain environment and not due to imminent liquidity stress.
We also anticipate but the second round deferrals will be concentrated independent makes sense of industries that we will discuss in a few minutes.
Finally.
We're not having meaningful shifts in credit metrics of our portfolio. At this time, we continued to believe that caution and visit vigilance are warranted and that additional provision to our loan loss reserve is prudent at 153 basis points of non PPP loans held to maturity.
We believe we're allocating a good supplement to our capital levels in an uncertain bar.
Excluding fair value marks on acquired loans, we were effectively at 173 basis points again, small and P.P. loans held to maturity.
Moving to page 18.
We emphasize this is not an outsized increase in this in.
We emphasize this is not an outsized increase in.
[noise] [noise] I'm, sorry, moving to page 18.
As previously noted we enhanced the diversification and granularity of our portfolio from our expansion into East, Tennessee. This will be further enhanced in the third quarter with the addition of the high performing institutions, who merge with Awesome July 1st first National Bank of Manchester and bank of Waynesboro, and we believe that this will continue.
Diversification to our portfolio.
Turning to the White charts on this page we note that despite slightly elevated levels of classified loans closed our tech both our classified and nonperforming assets or at a very conservative level relative to capital will not evident here I also note that impairments have been recognized on the nonperforming assets.
We anticipate collectability of the remaining balance as noted in the 1.46% still depends on mix is having in Pasadena portfolios criticizing classified loan levels, well, we know from quarter to quarter inquiries from 2.1% to 4%. We note that this increases coincident with the changes in economic environment and may be.
Further impacted by the depth and duration of the pandemic, but again.
We emphasize this was not an outsized increase in this environment and we believe that it will be consistent theme noted in the industry.
Let me pause for a minute to describe our risk oversight process implemented to address the pandemic enter weight our portfolio engage our expectations.
First in addition to our normal risk reviews, we identified individual borrowers borrower pipes and industries that maybe prone to disproportionate impact from pandemic.
In the early weeks of dependent we establish the expectation for our bankers to have regular ongoing communication with our borrowers in the commercial and real estate space.
Our goal is to gauge their assessment of the pandemic its impact on their businesses and their ability to with family.
It's my belief that we have at least monthly communication over the last three months with at least 75% likely more of our commercial and commercial real estate borrowers.
We know economic soft manifest themselves in waves and sometimes with cascading effect.
But as feedback from these regular customer interactions as reported back to US based on current facts. We believe that the second wave will be smaller than the first we're heartened in recent weeks to note that about 1.5 times more customers were thinking the worst lutein them or nearly behind them and those feeling lingering effects and in general.
All the vast majority of borrowers felt optimistic of their ability to.
To persevere based on their liquidity their cost containment efforts their participation in government programs and their general expectations for the passing impacts of the endemic in fact, some sectors or even possibly.
Well, there's however, our operating in certain sectors. The predictably have greater impact, where we anticipate at least 12 to 24 months to recovery.
Just reality is reflected in our ongoing risk rating process and dovetails into our assessment of our allowance for loan losses, and our provision for the second quarter turning to page 190, <unk> page 19, one of those sectors is launch.
Logic is clearly impacted nationwide as reported last quarter, we continue to underscore our commitment to disciplined underwriting on commercial real estate, where we require a high level of front in cash equity, which mitigates exposure to value swings throughout the economic cycle.
As a result, we also have a portfolio with low leverage and outstanding pre pandemic debt service coverage, which to weather the economic cycle.
Early in the pandemic.
Most of our lobbing borrowers reporting single or very low double digit occupancy, but we're confident that they had ample cash reserves cost control flexibility and other means of support to withstand a pandemic impact of several months or more.
Now we are seeing clear indications recovery in our east, Tennessee markets exposures, where project profiles are all interstate locations or severe county, Tennessee market, where the family oriented destinations of Gatlinburg and pigeon forge are located.
Beyond that about half of our exposure is in Nashville. These borrowers are still seem low double digit occupancy, but reporting very substantial cash reserves in older capacity for continued support.
While we anticipate that about half of our second round deferral requests will come from the sector. We also note that there are indications of strong pre bookings in Nashville for the second half of 2021 based on recent published accounts lodging magazine.
We will continue to watch this closely in coming weeks I anticipate there will be rating migration. This sector, but do not anticipate any near term impairment risk substantial flexibility exists for banks and borrowers where there is high levels of cash equity and good bar where liquidity.
Turning to page 20.
On page 20, I'm pleased to report that other industry sectors, where we initially anticipated high pandemic impact are performing well for us we anticipate a low level of second round deferrals and these sectors and continue to have a higher level of real estate secure exposure. In addition, our exposure in this piece.
Sectors is granular and proving resilient throughout the period.
Specific to senior living we remain keenly aware of the inherent risk in this sector.
Based on the vulnerability of the population segment served by our borrowers we regularly interact with our borrowers.
And our please note that none of the projects, we finance had been impacted by Cobot 19 infection. I'll also note that we had a 20% reduction exposure in the sector for Q2, resulting from a multi unit borrower selling a portion of this portfolio and paying off our debt.
Turning to page 21, we continue to note the diversified composition of our commercial real estate portfolio.
Last quarter, we presented the low LTV and high operating performance metrics on transactions exceeding $2 million in these property types. Please note. This graph segments, our portfolio exposure without the 2 million dollar floor on transaction size.
We also note that the that we have three types of retail exposure the relatively small exposure we have in direct loans to retailers as noted on page 20.
Try net loans held for sale, which are underwritten with high cash equity against long term triple net leases to national retail tenants and loans noted on this page to local commercial real estate investors with retail tenants underwritten with our high cash equity discipline.
Focusing on this retail component for a moment.
We were pleased to note the borrowers on these properties are still reporting minimal rent concession request from the tenants and anticipate ability to continue making debt service payments as scheduled while we anticipate some payment deferral requests in this space, we expect them to represent less than five or 10% of our sector exposure.
In addition relating to commercial real estate at 630, a regular <unk> regulatory concentration on the 100 and 300% CR re ratios stands at 49% and 241% respectively.
Excluding the trying it held for sale portfolio, it's below 220%.
Finally, let's discuss the allowance on page 22.
Combining the second quarters provision with out of the first quarter, we have increased our allowance by 67% from the pre pandemic level on December 31st for June Thirtyth, we present, our allowance to loans at a number of ways for your reference in the right two bars.
As a percentage of total loans held to maturity at 1.32% without purchase money market and 1.5% with purchase money marks or alternatively at 1.53%, excluding P.P.P. loans and at 1.73%, excluding TPP loans and purchase money marks.
We will continue to assess or allocations regularly and respond appropriately to changes occurring in this uncertain time with that I'll turn it back over to Mike to discuss capital.
Thank you Chris.
On page 23, I would say or capital remains strong.
Leverage and tangible common equity declined in Q2 due to our strong deposit growth, which triggered a large increase our cash position.
However, risk based capital a total risk based capital Rose 308 basis points in the quarter, including about 180 basis points related to the $30 million sub debt issuance, which Tim mentioned.
So I would remind you that the majority of the sub debt proceeds.
And in fact will reverse in Q3 as most of the sub debt proceeds were used to fund the cash portion.
The FCB merger consideration.
In terms of the next page on liquidity.
Just a quick comment I would say or liquidity is very strong our cash levels likely see throughout the industry. In this environment are above intended levels given strong deposit growth and as noted earlier, we are actively assessing opportunities to to address that.
Now I will turn it back to Tim Thank you.
Thanks, Mike.
As I previously mentioned, we closed our FCB transaction on July one I've never seen so many assumptions changed during a period with expected earnings on both sides and the relative balance sheet marks.
However, we still feel confident and our cost save targets and these organizations will be accretive to our nam efficiency ratio and overall profitability returns.
They also provide deposit and loan diversification, both geographically and granularity.
Included in the slides, our pro forma deposit and loan mix is from earlier this year and while the cost in rates have certainly changed you can see the relative positive impact we expect them to have on our bank.
As we close I want to emphasize our longer term priorities.
Star is a great bank operating in a great region of the country with a great management team all of which leads which leads to great prospects.
We have three main priorities.
One we will remain and we'll focus on being great risk managers, not just every day, but in a heightened sense during the current environment.
Number two we will work to improve what I call, our core pretax pre provision to assets and the consistency of that number and earnings.
This was the goal even before the current environment as we would like to strengthen the company to where we can deliver a 1.20% four so return on assets.
In light of more long term normal credit expenses of say 20 to 25 basis points.
Third we also are working hard to improve our organic growth through pipeline management, improving share of wallet hiring additional bankers and revamping our incentive plans.
Got it starts growth has slowed in recent years due to a few things.
To a strengthening of the company's balance sheet, whereby shared national credits, which had been contributing to recent growth, reaching 22% of loans for 212 million.
I have now declined to about 5% of loans or 90 million.
Certainly we could go put on another 100 150 million of shared National credits. If we wanted but again, we're trying to strengthen the quality of the balance sheet.
Be.
Hi, local property values, where by many businesses and projects have sold.
And lastly, the low rate environment of the last year were many commercial real estate loans went to the permanent market and portfolio mortgages have been refinanced in the secondary market, which is experiencing historically low rates.
While the near term environment is tough and we want to be cautious on new originations were very excited about our progress in this area and as Mike said have very strong pipelines.
That concludes our prepared comments and we'll be happy to answer any questions.
[noise] at this time, if he would like to ask a question. Please press star one thing or telephone keypad again that istar wondering or telephone keypad little phos forget supplemental compiled documenting roster thinking.
Your first question comes from the line or Jennifer Demba from Suntrust. Your line is open.
Hi, Jennifer.
Hi, Ken we're here.
Doing great.
Great.
If he can elaborate on the.
On the office <unk> thing from the clients on the PPP line he made to non client.
During the second we're kinda high.
That going forward over the next several months.
Yes, Great question, I think Thats, one I think first of all.
Okay I didn't catch our has a very strong mix of business I think in recent years. It did.
Certain percentage had become you know shared national credits have contributed which were trying to it certainly wasn't the predominant but it contributed.
And so we've been working very hard on Tennessee based loans. So this is a great opportunity in that effort.
I think it's tremendous we very proactively.
You know again I encourage you look at that National post Artico and do what I did I took.
The other banks that are three to 13 times, our size and multiplied Arsenal volumes were tremendous half of those are non clients. We had one customer who saw a a from memory a seven to 10 million dollar PTP loan from us and their bank wouldn't response, he actually copies.
As bank or the other bang on his application to loss.
And so people, we're just very frustrated so I think there's a big opportunity to move business and I can't size. It for you I mean, certainly not going to make or break our bank, but I think it will be new momentum for us and what we're doing around that Jennifer is we had a biweekly Monday morning commercial pipeline call that we've already had.
And Weve added a piece to that where every non client PPP customer.
Has received a personal let our signed by many.
No letting them know we were glad to be able to serve them and that we hope they will consider us for their business and we hope that they will use that experience to refer us to at least two customers to two friends of theirs.
And then we have assigned every non client TTP customer to a banker.
And we have a bank are reaching out to each one of them. This started about two weeks ago. So over the next 30 days every one of those will have received a letter and a personal call from one of our bankers.
[noise] with it and question for you might just curious about.
What you see as the near term net interest margin trajectory over the next couple of quarters.
Based on.
Yeah.
Sure. Thank you Jennifer I would say I don't want to.
Comment on specific numbers I would just say.
As I mentioned earlier, we are actively.
Evaluating our liquidity position.
Our deposit pricing situation.
Yes, we have as I noted significantly lower deposit rates throughout the quarter, but obviously with market rates at historic lows, we continue to.
Evaluate all pockets of our deposit.
Portfolio to ensure that say or price reasonably and appropriately based on current market environment.
I think in doing that.
We think that we would expect that some of those deposits might.
Opt to leave her possibly move into non deposit investments through capstar.
But.
We do expect the level of excess cash for us and I suspect through the industry.
To decline over time.
It has not declined as quickly as I had projected at what at the start of the pandemic nor as quickly as I hear from peers they had expected.
So it's really hard to put a number two it as I said they are the buildup in liquidity has been the primary driver.
Our decline and then for the quarter and so how deposit inflows reverse over time, which I believe they will.
HM.
And how how were to what extent, we're able to reprice well certainly impact the margin.
I would say.
So that it really is hard to put a number on agenda for those are some comments I'll give you as we think about our margin outlook.
[noise] diesel.
Thanks, Jennifer.
Your next question comes from the line of Omar Samalot from Raymond James Your line is open.
Maybe a quick modeling question from my so you'll have the expense base coming on from me a that sees the deals or how should we think about that expense base trending from here and really what does it look like with all the cost savings out of the system and maybe some of the timing of assays. Thanks.
Sure. The one thing I would say so.
The expense saves that we had modeled.
For FCB.
Are expected to and that was 25%.
Their cost phase, which.
As in the range of even see Q1 was around 3 million annualize, we see about 12 million.
We continue as Tim said to be optimistic with realizing that initial 25% cost saves on MTV.
From a timing standpoint.
I would say the majority of those will start to come in.
And mid to late Q4.
As we complete system conversions.
And we will fully realize those in 2021, but again 2020, there will be coming in later in the year mid to late Q4.
Thank you that's really helpful. Tim if I could switch to maybe a bigger picture question.
Got the deals close now at 3 billion, you've got a large organic platform with the opportunity to extract some efficiencies, but you've also got some dry powder. So how do you think about first started moving forward and as M&A, So where did that.
It is but.
On an organic person and I'm a shareholder person so.
I think we have an awesome company and there's a lot awesome companies, but you know 3 billion dollar bank not only in Nashville, but sort of the harder the southeast I mean, you just.
All you can you just training of all that you could do with that and I got a chart. The other day from an M&A standpoint, if I have all this I wish I had it I didn't think to bring it [noise], but [noise].
No.
Tuck in Tennessee, or the two stage in the southeast.
Really than consolidated the least so they're still that opportunity [noise].
But I'd love to see our core pretax pre provision [noise].
Yet to say 180 to 190 and that will take time, but we had a great mortgage this quarter, but as you know mortgage is not sustainable [noise].
So would love to see the core pretax pre provision get to 180 to 190.
And in the current tax environment.
It allows you to cover our 20 to 25 basis points to charge offs and still gets your profitability level.
Like to have a stronger balance sheet with less what I call wholesale.
And we can pick up the phone and call Bank of America buys many shared national credits as we want don't want to do that so really the quality of the franchise to profitability.
So I think there's a lot we can do internally with the 3 billion as you said on on profitability and efficiency that I hope will lead to a higher multiple.
You know if an attractively priced deals out there it's better for our shareholders.
But.
John very focused on maximizing what we have as the priority.
Thanks I appreciate the commentary one more question for me you don't mind.
As the pandemic provided you with the opportunity to really aggressively look at the branch network.
You know your clients are really been forced to adopt mobile banking. So how do you think about brick and mortar and the physical footprint.
I think that up that's fortuitous for cap starting caps are already is pretty much there and capstar.
Go back to the end of 2018 September 32018, Capstar was 1.4 billion.
Principally only in Nashville, and had five locations. So it was not a high office thank anyway.
The Athens, Manchester explains for organizations that were brought into the system.
There they are more community organizations not rural but not as much metro and I think that those markets are probably not as far along there on.
The metro markets on technology adoption and they Didnt have huge branch systems, either so I think that is a big opportunity for the industry. We may have a small opportunity on that but I think thats one of the advantages I can tell you the organization I just came from.
No we overlap with some of the major banks and and the last four years. When I was at Highlands, we were trying to grow revenue and most of the major banks, we're spending their time consolidating and combining branches. So there's a real advantage to us because it was a lot of disruption from employees and customers.
I don't think we have a tremendous amount of that I.
I would say on our efficiency I think there's no efficiency ratio is too high.
And it's hard to look at this quarter becomes mortgage inherently is a inefficient business, but it's a high or leave business. So this quarter is not a great quarter to look at the generally we've been above 60% and so just that value of getting below 62, a 58 or 59 is very valuable.
I see a lot of that coming from.
Better better contracts that are negotiating reviewing our services do we need everything we're doing can be combined vendors and get better pricing in my past, there's a lot of opportunity on the whole vendor management side.
[noise], that's really helpful commentary that's it for me thanks for taking my questions on congrats on a quarter.
Stay safe down there in Florida, I'm thinking about yet.
Got it thank you.
Your next question comes online defund counting.
From Piper Sandler Carolinas, hoping.
Hi, guys good morning.
Hey, good morning, Sir.
So maybe first.
If I could think about the mergers in the pro forma impacts I know you list kind of pro forma impact on loans and deposits in the deck, but all that data is from one Q and so I'm wondering.
If you still expect the pro forma impact to be.
Beneficial to both Youre standalone costs in deposit and loan yield and kind of what you think the basis point impact pro forma is just from the mergers standalone.
So first answer your questions easier one I'd say, yes, and we're really excited I'm a big fan of Citi Holdings in West, Virginia, and when you study skips investor that you know I'm, not saying were switching to that strategy, but one of the things he emphasizes.
Is maybe less competitive markets with with better pricing and I think that's what we get I think with Athens, Manchester and Waynesboro, you've got 300 year old institutions, very long relationships not that it's not competitive, but it's different than a Nashville, Raleigh Charlotte whatever so.
I do think they'll both be additive.
Yes.
We're in the point as you can appreciate of consolidated their balance sheet. The fed came down a ton. So I don't want to promise you. All I would say is that intermediate and long term I would think that that differential you Solomon starting hopefully we'd be additive to our margin no. We don't intend to price to whole company as one.
We intend to price by market and maintain their.
You know their current pricing structure, so I don't on a relative basis I don't see why that would change.
Okay, Great and then another one other question on the NIM here its just.
With where LIBOR is today one month I think it's about 21 22 bits below where the average was last quarter. So.
Can you remind us the amount alone that are tied to.
The one month LIBOR day, how much movement, you should see next quarter or how many might be at floors or otherwise that well see that same degree of moon.
I don't have that number exactly in front of me I'm happy to follow up and so don't hold me to this from from recent memory I think its and.
No 45, 50% range. It's a it's a significant amount that is variable and LIBOR based and so you know we like many banks were positioned the last several years and asset sensitive position.
And many people thought coming out of the crisis, there would be rising rates.
Which did happen for a little bit and nobody is expected this environment, but.
You know.
If rates stay low or fly bore were to go down there that would be a short term challenge.
So we can follow up and they can if you could make a note like Gallup with Steve Yeah.
And then I just on the on the credit side of things and I appreciate Chris a lot of the detail you gave around expectations and so forth I'm wondering if you know ballpark, where that 41 million in event for you in the Nashville hotels, what the occupancy rate is there currently and kind of where they need to beat it to sort of cash flow.
And then maybe any detail that you're receiving from the third party stress tests. So far about you know a range of any expected losses.
Oh.
Yeah. Thanks for the question first of all.
The the feedback we're getting and some of it is supported by a objective reference points that are maybe four to six weeks delayed sometimes but Nashville is in the low double digit and I mean 15 to 20 fiveish percent occupancy some of that may be driven by by season and so on.
But that's by and large a theme Oh, you know, we're seeing more activity downtown.
Even despite having some all the entertainment venues being closed.
And then.
Relating to the stress test and specifically our hotels within that again, it hearing to our high.
Cash equity proponent and we acknowledge the cash equity is not cash, but we also acknowledge that many of these same borrowers how very high levels of liquidity.
So the impact of lodging and potential losses under the stress test had minimal impact because it takes a lot of diminution of value. When you have a roughly 35% cash equity and 57% loan to value to really get you down to a level.
Oh the impairment in the subset. So we're not saying we won't have issues and we're not saying we won't have problems to address we're simply saying we believed that we're starting from a position our borrowers are starting from position of strength to hit these issues head on.
Okay, Great. That's extremely helpful. Chris and then maybe one last clarifying question for me just on the expenses was there any positive adjustment and apologies if I missed the on the Fas 91 accounting within salaries that would not repeat next quarter.
No nothing material, that's coming to mind right now.
Okay, great. It was all thanks to the colored always there's always some onetime positives and negatives right and you got to be careful not to take out too. Many because you forget somebody other ones and.
I think the clearest ones that wouldn't recur as a million for severance there's probably a couple others that are favorable towards expenses it wouldn't recur, but the clearest ones over 1.4 of 'em severance.
Hey, and before you hang up I just want to know we've got a lot of great partners that make us successful and this quarter, Sam or was one of them and so I just want to thank sandler for helping us with our sub debt raise and we value all of our partners and we appreciate your helped this quarter.
Thanks, and congrats on a on a very strong quarter.
Thank you.
Again, if he would like to ask a question. Please press star one and your telephone keypad again that Istar wondering your telephone keypad.
Our next question comes from the line Stuart lots from KBW. Your line is open right.
Hey, guys good morning.
Sure.
I appreciate it ought to color.
And kind of the guidance for deferrals next quarter, you know dropping from.
Relatively high peer level of 33%.
Chris Perry.
What.
The first look I cant FCB.
And kind of where you see those trending now if we think about it on a pro forma balance sheet what.
Is that 60% pro forma for FCB.
No either just real quick because I know Catherine writes a lot you know, 33% one of the higher in the industry again, I think that people are not understanding what we did.
We were out probably a week before everybody and we worked with the state of Tennessee, and the Federal Reserve, we will and calls almost every day, we were first mover in the market. We didnt really think of it as a credit we at that point in time. If you remember every body was like what do you do you know cash and so.
We really thought about how do we be a great community bank and how do we need the cash and liquidity mines of all of our customers. So we offer the to 100%. So I think I mean, I would encourage you to be cautious when you it's not apples to apples and so that's really not a fair comparison had we chose most every other program I saw it was a qualification.
Right. So you had to come in and ask for it and then you were sort of underwritten given its I guess I'd ask you to be cautious.
I'm trying to compare that to go ahead, Chris Yeah, I understand and appreciate the question first of all please understand that when we add when we blend them into our portfolio I believe that they'll be about 18% of our combined book and it is a very granular portfolio that they have so we don't and.
Dissipate first of all my number was not was not combining with them all but we don't anticipate substantive swings up because of the addition of their portfolio into our book.
It's a very.
Very granular there is some construction and development in the Murfreesboro, Tennessee markets in the southeast of Nashville, and those loans are all are going to buyers right. Now is one of the fastest growing cities in America and continues to have hike, hi, construction and our new home sale activity. So.
Not initially concerned about that but we'll continue to monitor it.
Great. Thanks, Sir thanks for the color.
And then in terms of the marks on that should be next quarter. How are you guys thinking about your reserves. Both you know ex the March what's the addition of the blown book, but then also with the purchase accounting Morrison.
Do you expect it to stay relatively level from from this quarter I think 175, if you include.
Your total purchase accounting works is that Oh, so I'll make a I'll make a quick comment and Chris can add because he he probably has been more involve recently and that in a tactical but.
No. These are two banks that have had outstanding credit for long time, and so we use affirmed that a lot of banks use for the devaluation of the interest rate and credit marks and so forth and obviously did that in our due diligence and as I said and you can imagine how much has changed multiple time. So the outlook is probably a little more favorable.
Now that it may be was 30 45 60 days ago. So we actually had a markets beginning we went and got a remark I don't remember, Chris maybe 45 50 days ago and we're in the process of Truing up those marks right now based on current economic outlooks and so forth. So we don't really have enough.
On the marks or how that would alter the immediate tangible book value dilution, but Chris you want to add any color that I think she only we feel good right now with the reserve levels, Yeah, absolutely and Stuart I'll say, we're not going into the quarter all or into the the next few quarters with <unk> with an expectation except that it's a math.
[noise] or size, we're going to look for directional alignment if we see increases in delinquencies leading to higher levels of criticized classified loans. All at we'll do our assessment of the risk exposure in that we will react and respond accordingly. So the theme I would say isn't so much tied to a number as it.
Just a directional alignment with what's happening in the economy.
Good thanks for taking my questions guys.
Thank you Stewart.
I think that debt.
That concludes the call we don't have any other calls in the queue. So we appreciate or by calling in and we're proud of the quarter and we're working hard and.
We'll do our best to keep up our performance and improve our performance. So hope everybody stay safe and we appreciate you calling in thanks.
This concludes todays conference call you may now disconnect.
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